The relationship between a real estate broker and a consumer is governed primarily by the common law of agency—legal principles developed centuries ago that still regulate the principal-agent/master-servant relationship. Real Estate License Law and Commission/Department rules supplement and expand upon the fundamentals of agency by requiring, for example, that all agency agreements be in writing. All agents must understand these fundamental principles to effectively and competently interact and work with or for consumers.
Contract law principles generally govern business interactions between real estate brokers, particularly regarding compensation agreements. A real estate broker who affiliates with a company should have a written employment agreement with the company (even if treated as an independent contractor for tax purposes) but is also known as an “affiliated agent.” Thus, that relationship is subject to both contract law and agency law.
This chapter explains how these various laws and rules impact a real estate broker’s business relationships, conduct, and obligations. After a brief introduction to common-law agency principles, we will review:
Real estate brokerage contracts (agency agreements) and broker practices when working with sellers and buyers are covered in Chapter 9. NOTE: The term “broker” will be used to refer to either an individual agent or to the firm or to both, as the context dictates.
INTRODUCTION TO THE COMMON LAW OF AGENCY
There are always at least two parties in any agency relationship: the principal and the agent. An agency relationship is created when one person (the “Principal”) authorizes another person (the “Agent”) to handle certain matters on behalf of the principal. It harkens back to the day when the king and earls (the masters) could not personally oversee their fiefdoms and employed trusted servants (agents) to supervise specific operations.
Chapter 8| RELATIONSHIPS IN BROKERAGE PRACTICE
Basic Terms
Agent’s Fiduciary Duties
A “fiduciary” is a person who acts for another in a relationship of trust and who is obligated to act in the other’s best interests, placing the other’s interests before any self-interest. Persons considered fiduciaries include guardians, executors, attorneys, and real estate brokers when acting as an agent. Under the common law of agency, an agent owes certain fiduciary duties to the principal, including obligations to be loyal to the principal and preserve personal, confidential information about the principal, to operate in good faith to promote the principal’s interests, and to disclose all facts to the principal that may influence the principal’s decision. An agent’s fiduciary obligations to the principal preclude the agent from taking advantage of the principal in any manner during the course of the agency relationship.
Agency law also requires that a real estate broker, like any other agent, exercise a high degree of skill, care, and diligence in the conduct of the agent’s duties. The level of skill, care, and diligence required of a real estate broker is determined by standards set forth in the State General Statutes, State Real Estate Commission rules, court decisions, and the professional standards prevailing in the community where the broker works.
An agent will be responsible to the principal for any loss resulting from the agent’s failure to fulfill their fiduciary duties. An agent must also fully and truthfully disclose to the principal all facts and information known to the agent or discoverable by the agent with reasonable diligence that may affect the principal’s decision, and the principal has a right to rely on the agent’s statements.[1]
Classification Based on Scope of Authority
Under the common law of agency, the scope or extent of the authority granted to the agent by the principal determines whether the agent is classified as a 1) special, 2) general, or 3) universal agent. While a broker won’t see these terms in any agency agreement, they continue to be used to define the extent of the authority conveyed by the principal to the agent. The vast majority of real estate sales transactions typically authorize special agency, whereas property management agreements may authorize a general agency. Each classification is defined below.
Special Agency: A special agent is only authorized to perform one or more specific acts on behalf of the principal in accordance with the principal’s instructions. Most sales transactions involve special agency, as the agent is hired to help the buyer find or the seller sell a particular piece of property, and that is all.
General Agency: A general agent is authorized to perform a range of acts, within specified parameters or limitations, on behalf of the principal. Some property management agency agreements may grant a general agency, authorizing the agent to not only find a tenant but also to collect the periodic rent, respond to repair and maintenance requests, authorize certain repairs, pay certain monthly property expenses on the owner/principal’s behalf, etc.
Universal Agency: A universal agent is authorized to transact all of the principal’s business of every kind. A principal may only have one universal agent at a time, i.e., one person authorized to handle all of the principal’s business and personal matters. Real estate brokerage practice rarely, if ever, involves a universal agency.
Chapter 8| RELATIONSHIPS IN BROKERAGE PRACTICE
Creation of Agency Relationships
Under the common law of agency, agency relationships could be created by an express agreement, whether oral or in writing, or by an implied agreement based on the actions and conduct of the parties. The most common methods of creating agency relationships in real estate brokerage transactions are listed and briefly described below. In each situation the consumer— whether the owner, buyer, or tenant—is the principal, and the broker or brokerage company is the agent. A more in-depth discussion of agency contracts used in real estate sales transactions is found in Chapter 9; property management contracts are addressed in Chapter 17; and tenant representation agreements in commercial transactions are covered in Chapter 19.
Common Agency Agreements in Real Estate Brokerage
Listing Agreement: A listing agreement is a written agreement in which a property owner hires a broker to assist the owner in marketing the owner’s property and in locating a ready, willing, and able buyer to purchase the property at a price and terms acceptable to the owner.
Property Management Agreement: A property management agreement is a written agreement in which a property owner hires a broker to manage property, find tenants, collect rents, maintain the property, enforce rules, evict tenants, and such other services as are expressly delegated to the agent. If the broker is hired solely to locate a tenant without any additional management services, then the owner and broker typically enter into an Agreement to Procure Tenant rather than a full-service property management agreement.
Buyer Agency Agreement: A buyer agency agreement is an express agreement in which a prospective purchaser hires a broker to locate a home or other property for the buyer at a price and upon terms acceptable to the buyer.
Tenant Representation Agreement: A tenant representation agreement is an express agreement wherein a prospective tenant hires a broker to locate a suitable property for the tenant to lease. These agreements more frequently are encountered in commercial rather than residential transactions, as residential tenants often are unrepresented.
As mentioned, the common law of agency permits an agency relationship to be implied from the parties’ actions. In an implied agency, the parties never expressly agree to act as principal and agent, yet the way they interact with each other evidences a silent or implied intent to act as principal and agent. This should never happen in a real estate brokerage transaction as the Commission’s rule requires all agency agreements to be express from the outset (and in writing if representing an owner). Nonetheless, if not careful, a broker may unintentionally create an implied agency with a consumer based on the broker’s conduct.
This frequently was the case prior to the advent of buyer agency in the 1990s, when the default presumption was that all brokers represented the seller, even if not affiliated with the listing company. Yet the broker showing the unrepresented buyer numerous properties, as the agent of a seller the broker had never met, frequently would begin giving advice or counsel or acting as if the buyer was the broker’s principal rather than the seller, creating an implied agency relationship with the buyer contrary to the broker’s fiduciary duties.
Who Pays the Agent Does Not Control the Agency Relationship
Agency relationships in brokerage transactions must be based on an express agreement between the parties where the consumer affirmatively hires a brokerage company to represent the consumer’s interest. Who pays the broker does not necessarily determine who the broker represents; it is merely one factor to consider. For example, a buyer agency agreement may obligate the buyer to pay the broker, but the broker may agree to first seek compensation from the seller or listing company from the sale proceeds. Even if the listing company or seller pays the buyer agent, it in no way negates the buyer agency agreement nor converts the buyer agent into a seller’s agent.
Types of Agent Authority
In addition to being classified as either a special agent, general agent, or universal agent, the principal and agent should clearly specify and agree upon the scope/limits of the agent’s authority to avoid the agent overstepping the limits of the authority delegated by the principal. Legal theory recognizes three sources of an agent’s authority:
Express Authority: The authority specifically granted in the agency agreement that concerns what services the consumer-principal desires from and authorizes the agent to provide. Express authority is synonymous with actual authority. To avoid misunderstandings or the agent exceeding the authority granted, the parties should have a very clear mutual understanding of what each party—principal and agent—will or will not do.
Implied Authority: The opposite of “express,” implied authority rests on custom and practices, rather than on an oral or written grant of authority from the principal to the agent. Custom may define or limit an agent’s authority. For example, an “Exclusive Right to Sell” listing agreement does not authorize the listing broker to actually sell the owner’s property nor is such authority implied by custom. However, custom might imply the authority of a property manager to sign leases that bind the owner, even if such authority is not expressly granted in the written property management agreement, so long as the agreement does not specifically withhold that authority.
Apparent Authority: Apparent authority is a more complex concept. Typically, it refers to situations where the principal is aware that their agent is going beyond the limits of the authority granted by the express agency agreement or implied by custom in the agent’s dealings with a third party, who reasonably believes the agent has authority to act in a particular manner, and the principal does nothing to stop the agent or inform the third party. Because the third party reasonably believes that the agent has this (apparent) authority, the principal may be legally bound by the agent’s actions, even though the actions exceeded the agent’s actual authority.
Independent Brokers versus Broker-Associates/Salespersons
Provisional brokers must be affiliated with a real estate company under the supervision of a broker-in-charge to legally engage in brokerage activities. A broker who has removed provisional status may choose to provide brokerage services independently, either as a sole proprietor or an entity/firm, or affiliate with a real estate company. If the broker practices independently, then the consumer enters into an agency agreement with the broker’s company and has only one agent, unless the broker has other agents affiliated with the broker’s company.
However, many brokers choose to affiliate with a real estate firm or company and conduct business under the company’s umbrella. The individual licensees are called affiliated agents, and the company is the principal to whom the individual agents owe the same fiduciary obligations as they do to consumer-clients. Licensees must understand that the consumer legally is doing business with the firm; the agency agreement is between the firm as agent and the consumer (seller, buyer, landlord, or tenant) as principal, not the individual affiliated agents.
A broker affiliated with a real estate firm is an agent of the firm under the common law of agency. This is true regardless of whether the individual broker is paid as an “employee” or an “independent contractor” for income tax purposes. As agents of the firm, all individual brokers affiliated with the firm automatically become agents of any principal-client of the firm upon the signing of the agency agreement between the firm and the principal. For example, when a listing agreement for the sale of property is executed for a real estate firm by a broker affiliated with the firm, all brokers affiliated with the firm automatically become agents of the property owner (seller). Technically, the firm is the agent of the seller, and each affiliated broker is a subagent of the seller. The agent-subagent distinction is a legal distinction having little practical effect, since both an agent and subagent owe the principal the same duties.